Business Context and Reporting Period
Company: Griffon Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended June 30, 2006
Business Overview: Griffon operates four reportable segments: Garage Doors, Installation Services, Specialty Plastic Films, and Electronic Information and Communication Systems.
Key Financial Metrics
| Metric (in millions) | Q3 2006 | Q3 2005 | 9M 2006 | 9M 2005 |
|---|---|---|---|---|
| Net Sales | $429.1 | $350.9 | $1,153.7 | $1,013.6 |
| Gross Profit | $108.3 | $91.6 | $287.7 | $257.2 |
| Operating Income | $27.9 | $18.0 | $53.4 | $43.4 |
| Net Income | $19.4 | $12.9 | $33.3 | $26.2 |
| Diluted EPS | $0.61 | $0.41 | $1.06 | $0.84 |
| Cash from Operations (9M) | $19.3 | $46.1 | ||
| Long-Term Debt | $199.4 | $196.5 | ||
| Cash & Equivalents | $32.1 | $88.5 (2005) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 22% in Q3 and 14% for the nine-month period compared to the prior year.
- Profitability: Net income rose 51% in Q3 and 27% for the nine-month period. Operating income increased 55% in Q3.
- Cash Flow: Operating cash flow for the nine months ended June 30, 2006, decreased significantly to $19.3 million from $46.1 million in the prior year. This decline was driven by increased inventory levels, higher contract-related receivables, and a change in the classification of tax benefits from stock option exercises.
- Segment Performance:
- Electronic Information: The primary driver of growth, with sales up $60.4 million in Q3 due to a large subcontract with Syracuse Research Corporation (SRC). Backlog reached a record $390 million.
- Garage Doors: Sales increased due to favorable product mix and price increases; operating profit remained flat year-over-year.
- Specialty Plastic Films: Sales increased 7% in Q3, but nine-month operating profit declined $5.4 million due to lower unit volumes and higher resin costs.
- Installation Services: Sales increased 12% in Q3, driven by volume in Las Vegas and Phoenix, though management anticipates a slowdown in fiscal 2007 due to weaker housing markets.
Guidance, Outlook, and Risks
- Outlook: Management expects continued volume expansion in Specialty Plastic Films, particularly in hygiene products, with new elastic films expected to ship commercially in Q4 2006. The Electronic Information segment expects to complete 70% of the SRC contract by year-end.
- Cost Pressures:
- Resin: Prices spiked in June 2006, negatively impacting Specialty Plastic Films margins by approximately $1.0 million in Q3. Further increases are anticipated.
- Steel: The Garage Doors segment is experiencing significant cost increases due to a tightening steel market and has announced selling price increases for Q4 to recover costs.
- Capital Allocation: The company purchased $17.2 million of treasury stock in the nine-month period. A new $150 million revolving credit facility was established in December 2005. A $15 million acquisition of a manufacturing facility in Troy, Ohio, was completed subsequent to June 30, 2006.
- Risks: Forward-looking statements are subject to risks including business and economic conditions, competitive factors, pricing pressures for raw materials (resin and steel), and capacity constraints.
Investor Verification Checklist
- SRC Contract Sustainability: Verify the duration and renewal potential of the Syracuse Research Corporation subcontract driving the Electronic Information segment's record results.
- Raw Material Hedging: Assess the company's ability to pass through rising steel and resin costs to customers without losing market share.
- Working Capital Trends: Monitor the continued increase in accounts receivable and inventory levels, which significantly reduced operating cash flow in the current period.
- Housing Market Exposure: Evaluate the impact of the weakening residential housing market on the Installation Services segment, particularly in Las Vegas and Phoenix, for fiscal 2007.
- Debt Covenants: Review the terms of the new $150 million credit facility and any potential covenants related to leverage or liquidity.